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How Can Theft Prevention, Reporting, and Return Filing Be Improved?

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Changing the April 15 due date, moving taxpayer
information to the cloud, and allowing personal
identification numbers (PINs) for taxpayers who want them
were all on the table at a Thursday hearing held by the IRS
Oversight Board to explore ways to combat fraud and improve
tax administration. The board, composed of presidential
appointees with tax, technology, or business expertise,
advises the IRS on the best ways to meet taxpayer needs.

Identity theft and fraud

Fraud and identity
theft are still rampant, according to Michael Phillips,
acting principal deputy inspector general, Treasury
Inspector General for Tax Administration (TIGTA), who cited
billions of dollars fraudulently claimed on refundable
credits such as the American opportunity tax credit. The IRS
recently prevented $12.1 billion of potentially fraudulent
refunds from being issued, but “more work needs to be done,”
he said.

Fraud comes in many forms, observed James R.
White, director of tax issues for the U.S. Government
Accountability Office (GAO). Given its many sources, such as
failure to file, underreporting, and offshore tax evasion,
multiple approaches are needed. White recommended increasing
third-party information reporting such as contractor service
payments and revising the information reported on Form
1098-T, Tuition Statement, and on Form 1098,
Mortgage Interest Statement.

“A fundamental
tax administration goal for combating fraud,” according to
Jeffrey Porter, chair of the AICPA Tax Executive Committee,
“is establishing one point of contact within the IRS for
prompt resolution of identity theft cases,” as called for by
former IRS Commissioner Douglas Shulman and National
Taxpayer Advocate Nina Olson. Currently, 21 units exist
within the IRS to help victims of identity theft.

The
board interrupted Porter to applaud as he began to emphasize
that the IRS “should be provided with full funding” to
effectively combat fraud. “We believe the Service should
continue to increase the level of staffing dedicated to
identity theft cases and improve its training of agency
employees to ensure the proper response and assistance for
identity theft victims,” Porter said.

Porter said
the IRS’s proposed regulations authorizing filers of certain
information returns to voluntarily truncate a taxpayer’s
identifying number is a positive step. In addition, Porter
said, the truncation program should be extended to permit
truncated Social Security numbers on all types of tax forms
and returns provided to a taxpayer. The AICPA has
recommended to Congress that it pass legislation so that
truncated numbers could be used on Forms W-2, Wage and
Tax Statement.

Larry Gray, government liaison
for the National Association of Tax Professionals, stressed
that getting away from using a Social Security number was
instrumental to reducing identity theft. Currently,
taxpayers who were previous victims of identity theft are
assigned a PIN by the IRS, but most others must furnish a
Social Security number. Asked about allowing taxpayers to
request a PIN, Porter said he saw no reason that it would be
a problem.

Real-time tax system

Under the
IRS’s proposed “real-time tax system,” if the IRS found
discrepancies between a tax return and data in IRS records,
such as a W-2 or Form 1099, the taxpayer would be given an
opportunity to fix the problem before the IRS accepts the
return. The proposal is in preliminary stages—no regulations
have been developed yet. Under the current system, the IRS
often matches the data as much as a year or more after the
tax return has been filed and processed. The benefits of a
real-time tax system make it worth exploring, panelists from
various industries concurred, but it also poses some serious
challenges.

Bernie McKay, chairman of the Council
for Electronic Revenue Communication Advancement (CERCA),
recommended that the IRS partner with the private sector to
develop a cloud-based approach for such a system. The
information would be automatically filled in using income
information stored on the internet.

Harry Cooper,
executive deputy director of South Carolina’s Department of
Revenue, expressed concern that taxpayers may develop a
false sense of security with data being stored in the cloud.
“Security should be the first and last consideration,” he
said. A security breach in South Carolina’s system involving
more than 3.8 million Social Security numbers cost the state
more than $20 million to fix. However, he also pointed out
that a real-time system could help states with collection
efforts.

Lonnie Gary, representing the National
Association of Enrolled Agents (NAEA), said such a system
was conceptually appealing but observed that a further
compressed filing season could not be risked, noting, “We
are coming off of one of the most challenging tax seasons
seen in my career.” He also raised concerns about what would
happen if information does not match and the return is
rejected, questioning whether the IRS had the real-time
customer service capacity to address that during tax season.

Asked by a board member whether June 15 was a viable
alternative for tax day to allow more time for the system,
panelists agreed it should be discussed. “There is nothing
magical about April 15,” noted Pete Isberg, president of the
National Payroll Reporting Consortium. “If it’s written in
stone, we have stone-carving tools,” he added.

Isberg
also outlined a few options for making the current W-2
reporting system better, including quarterly reporting, now
required by some states, as well as expanded e-filing,
reporting information directly to the IRS rather than the
Social Security Administration, and an earlier due date.
“March 31 doesn’t make much sense,” he said.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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